Don’t touch a pension with high exit charges with a barge pole

8th May 2013

The pension minister Steve Webb is concerned about the fact that people may be trapped in pensions which then levy exit charges if they decide to leave. The minister says that he will aim to deal with the issue of legacy pensions i.e. charges on older plans as part of new pension reforms. But he hopes that the insurance industry raises its game and brings down any penalties off its own bat.

In the last couple of decades, there were often penalties levied for exiting a pension and, rightly or wrongly, this was seen as acceptable at the time.

The argument ran that it would cost the pension company to deal with you in the early years so if you exited after a year or two then, it could penalise other investors/policyholders.

Some of this money may have gone into with-profits funds. Once again, and arguably more justifiably, that could have seen some classes of policyholders penalised, if exit charges were not levied especially at times when stock markets had fallen.

Incidentally, there was also a tendency to levy most charges upfront when you took out a pension. In many cases, this meant that after a few years, investors could still have had a pot of money worth less than the amount they put in. Not great for confidence.

However time has moved on or so we thought. In the early 2000s, the Government brought in the stakeholder pension. This was meant to spread pension savings though it did not succeed in that aim. It did help bring down charges especially early years charges and the rules required free movement out of stakeholder schemes. Most other types of pension investment came into line with the stakeholder rules.

But pension firm Hargreaves Lansdown argues that some pension plans, which could be started by investors now, still levy significant exit charges.

At Mindful Money, we are baffled that any sort of contract still exists and could be taken out today and can levy big exit penalties. It does not feel appropriate to a competitive market place that delivers for consumers. It certainly does not fit with a pension market place in which people change jobs frequently. If you are thinking about taking out a pension plan and you find out that it includes big exit charges, then Mindful Money suggests you find another pension or ask your adviser to find you another one. In fact, we think you may be wise to find another adviser altogether.There may be some specific issues attached to older contracts. With some older insurance funds, if half the investors run for the exit, it could damage the interests of those who are not as fleet of foot. They may need judged on a case by case basis.

But with new pensions, we cannot see what excuse there is. If your pension under performs, you should be able to leave without significant penalities. We suggest you never lock yourself into that arrangement.